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Counter revolution continues

Trevor Green outlines the challenges and opportunities facing the retail sector in 2015

January 2015

There are two important economic and political issues facing the retail sector in 2015. The first is the outlook for UK wage growth and the second is the impact of the general election. There have been signs of a pick-up in wage inflation recently and, if this continues, it should prove a nice tailwind for consumer spending. In terms of the sector’s performance ahead of the general election, if the last five elections are any guide, the sector has underperformed in the run-up to the election then rebounded the month after. Obviously this time may be different, but we are mindful that pre-election market volatility could create some worthwhile buying opportunities.

Discounters on the up

In 2015, I expect discount retailers to win more market share. In 2014, we saw Aldi’s and Lidl’s disruptive influence on the major supermarkets and the ensuing price war. Moving away from food into general merchandise, the flotation of discounters Poundland and B&M European Value Retail was well received. Both companies have aggressive expansion plans and I expect them to win market share in 2015, whilst proving to be a disruptive influence on High Street pricing dynamics.

AO World floated in early 2014. While the shares have been volatile, the online electrical goods retailer’s underlying business is sound and customers are impressed, as evidenced by favourable online post-sale responses. AO World’s entry into the German market ran smoothly, and ahead of schedule, and I expect this division to become a meaningful contributor to profits over time.

Shoppers’ demands for faster delivery are a headache for traditional retailers, who must invest heavily in their distribution networks in order to meet raised delivery expectations. Unable to rely on just a handful of huge hubs, they now require several smaller hubs in to service customers quickly. Companies such as Tritax Big Box REIT, which owns warehouses that serve major retailers, are benefiting from this trend and should do well as investment in this area accelerates.

Dixons Carphone in the spotlight

The merger between Dixons and Carphone Warehouse was one of the sector highlights in 2014. This was well received by investors and resulted in a 73.1 per cent1 share price rise in 2014. Cost-savings for the combined group are ahead of target and 2015 will be about proving that there are revenue synergies for the new merged entity.

New car sales figures consistently surprised on the upside in 2014 but the share prices of the main motor distributors, including Vertu Motors and Pendragon, were in the doldrums. With growing take-up of the highly attractive PCPs (Personal Contract Purchase) flexible financing option for purchasers, I expect 2015 to be another year of healthy new car sales.

Sports Direct was in the news in 2014, with coverage often focused on its high-profile founder. Sports Direct remains the UK’s leading sports retailer and has an exciting Pan-European roll out strategy. Management’s recent trial of free delivery in Europe led to a tenfold increase in European sales.

Finally, its change at the top at Kingfisher when the head of the French arm, Veronique Laury, becomes the new CEO. Outgoing CEO Ian Cheshire did a great job in a highly competitive industry and all eyes will be on his successor who must juggle growing Screwfix and Brico Depot while restructuring B&Q.

1 Source: Bloomberg, total return items

Important information:

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 1 January 2015. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

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Trevor Green

Head of UK Equities

Main responsibilities

Trevor manages institutional and retail UK equity funds.

Experience and qualifications

He previously worked as a fund manager at Henderson Global Investors, where he was co-manager of the Henderson Managed Distribution Fund and provided equity input into the Henderson World Wide Income Fund. Prior to this, Trevor worked at New Star Asset Management and before that spent nearly six years at RCM. He has also worked at Credit Suisse Asset Management and started his career at Capel Cure Myers.
Trevor holds a BA Honours degree from Aberdeen University